Can Rising Semi-Demand Change Advanced Energy’s (AEIS) Fate?

Shares of Advanced Energy Industries Inc.AEIS have gained almost 9.7% over the past two weeks. However, looking at a longer period, the stock has declined 1.6% year to date versus the Zacks Semiconductor Wafer Fabrication industry’s rally of 13%.

Can the stock keep the recent price momentum alive and catch up to the industry rally soon?

There is actually no major fundamental headwind that could stop the stock from moving higher. In fact, the potential benefits from rising demand in the semiconductor end-market might help the stock gain traction.

Moreover, Advanced Energy’s prudent capital deployment, which includes strategic buyouts and share repurchases ($70 million remaining under the current program as of Dec 31, 2017), should keep supporting its bottom-line.

The only factor that could affect Advanced Energy’s growth profile is its customer concentration. Two large Original Equipment Manufacturers (OEMs) — Applied Materials AMAT and Lam Research LRCX — accounted for 33.5% and 23.1% of 2017 sales, respectively.

However, this is a risk to its business model and unlikely to have any bearing on the forces that could drive the stock higher in the near term. After all, these two customers don’t appear to have any tangible issues with Advanced Energy’s services so far.

Positive Growth Projections

Interestingly, estimates for the company’s current quarter and current year earnings have moved higher over the past three months, depicting analysts’ optimism over its earnings growth.

The Zacks Consensus Estimate for its full-year 2018 earnings of $5.21 per share represents a year-over-year increase of 9.2%. For the next quarterly report, the company’s earnings is expected to grow 26.9% over the year-ago quarter to $1.32 per share.

The earnings growth is expected to come on the back of solid sales. The consensus sales expectations for the first quarter and full year 2018 are $187.7 million and $741.8 million, representing year-over-year growth of 25.7% and 10.6%, respectively.

Continuing Semi-Demand to Drive Top Line

Advanced Energy is a leading supplier of power subsystems to the semiconductor end-market. Management now targets sales of $1 billion, which it expects to reach over the next three-years, driven by continuing organic growth as well as solid contributions from acquisitions ($150-$200 million over the same time frame).

The demand for Advanced Energy’s solutions is being driven by increasing investments in complex 3D NAND devices, DRAM and logic. Notably, Semiconductor Capital Equipment sales (68.8% of total sales) surged 41.5% to $461.7 million in 2017. The company commenced shipping of its next generation solid-state match during the fourth quarter.

Moreover, Advanced Energy’s top-line is expected to benefit from improving dollar content per stack, as NAND manufacturers focuses on adding more layers. The additional layers are also driving demand for the company’s power control modules. Also, continuing adoption of the company’s plasma-based processes is expected to drive segment growth.

Non-Semi Business Grows on International Customer Win

It is also encouraging to note that Advanced Energy’s non-semi business outperformed management expectations in 2017.

Industrial Capital Equipment sales (17.4% of total sales) soared almost 39% year over year to $117 million. The acquisition of Excelsys (completed in July 2017) expanded the company’s product offerings in specialty power business and market share.

Moreover, Global Support (13.8% of total sales) increased 26.3% to $92.4 million. The company’s strategy of offering engineered service products drove this growth.

Advanced Energy is rapidly penetrating into the flat panel display market in China, as demand for OLED enabled mobile devices has been increasing significantly. The company’s Ascent product has also gained significant traction in the glass coating market.

Valuation Indicates Plenty of Upside

Advanced Energy currently trades at 13.89X its 2018 EPS estimate, lower than the industry average of 16.67X. Over the past year, the stock’s forward P/E ratio has been as high as 23.07 and as low as 12.66, with a median of 17.76. So it appears that there is a solid value-oriented path ahead for the stock.

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